Warren Buffett on Why You Shouldn't Trust Forecasts

If you could reliably predict tomorrow’s stock market winners, would you freely share your valuable insights with others?

Warren Buffett raised the subject of forecasters and pundits in his latest Berkshire Hathaway shareholder letter. (I am a longtime Berkshire Hathaway shareholder.) The context for the above question came from Buffett’s description of his sister, who he described as instinctively knowing that “pundits should always be ignored.” Buffett analogized having the ability to “reliably predict tomorrow’s winners” and then sharing their names as akin to “finding gold and then handing a map to the neighbors showing its location.”

The difficulties of forecasting are not just related to picking short-term winners among stocks. It’s also challenging when trying to identify a long-term investment. “Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes,” observed Buffett. “It’s harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake oil salesmen.”

He also extended the challenges of forecasting to foreign exchange rates. In referencing Berkshire Hathaway’s investments in five Japanese companies—Itochu Corp. (ITOCY), Marubeni Corp. (MARUF), Mitsubishi Corp. (MSBHF), Mitsui & Co. Ltd. (MITSY) and Sumitomo Corp. (SSUMY)—Buffett said, “Neither Greg [Abel] nor I believe we can forecast market prices of major currencies. We also don’t believe we can hire anyone with this ability.”

(Abel runs all noninsurance operations for Berkshire Hathaway. He is “in all respects … ready to be CEO of Berkshire tomorrow,” according to Buffett.)

There are two things in the world of finance that can be predicted reliably (beyond Abel’s next job title). One is the likelihood of investors, both individual and institutional, to panic. “Today’s active participants are neither more emotionally stable nor better taught than when I was in school,” observed Buffett. The second is the likelihood of one or more players in the financial services industry playing off investors’ emotions. Again from the letter, when “feverish activity” causes investors’ “juices to flow … whatever foolishness can be marketed will be vigorously marketed—not by everyone but always by someone.”

Among the reasons why I quote from the annual Berkshire Hathaway shareholder letter is that Buffett’s writings are a good reminder of how you should approach investing. Even just following this seminal advice will make a big difference in your portfolio: “One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital. Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been—and will be—rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.”

We at AAII have a long history of promoting rules-based approaches to investing grounded in research and data. We’ve also long encouraged individual investors to take a long-term view of their portfolios while incorporating any shorter-term needs for withdrawals.

At the same time, while we’ve openly shared our views of what we’re observing in the market and historical trends that could repeat, we’ve never believed that the future direction of the stock market or individual investments can be predicted with accuracy. As AAII founder James Cloonan wrote in 1981, “Don’t believe in anyone else’s system for making a ‘killing’ in the market. If you find such a system, write me ‘confidential’ from your yacht and send your jet for me to come and discuss it.”

Buffett’s Remembrance of Charlie Munger

One thing many of us Berkshire Hathaway shareholders were awaiting in this year’s letter was what Buffett would say about his longtime business partner and friend, Charlie Munger. Munger died in November 2023.

Here is a snippet from Buffett’s remembrance: “Charlie was the ‘architect’ of the present Berkshire, and I acted as the ‘general contractor’ to carry out the day-by-day construction of his vision. Charlie never sought to take credit for his role as creator but instead let me take the bows and receive the accolades. In a way his relationship with me was part older brother, part loving father. Even when he knew he was right, he gave me the reins, and when I blundered, he never—never—reminded me of my mistake.”

The normally verbose Buffett limited his remembrance of Munger to about one page. On the first “official” page of the shareholder letter, Buffett wrote, “Charlie Munger, for decades my partner in managing Berkshire, viewed [the obligation of writing the annual letter] identically and would expect me to communicate with you this year in the regular manner.”